What Investors Should Know About Wilmar International Limited’s (SGX:F34) Financial Strength
A market capitalization of SGD19.55B puts Wilmar International Limited (SGX:F34) in the basket of stocks categorized as large-caps. These stocks draw significant attention from the investing community due to its size and liquidity. However, a more fundamental aspect of investing in large caps is its financial health. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. See our latest analysis for Wilmar International
Does F34 face the risk of succumbing to its debt-load?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. For F34, the debt-to-equity ratio stands at above 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. F34’s profits amply covers interest at 15.22 times, which is seen as relatively safe. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Does F34 generate an acceptable amount of cash through operations?
A basic way to evaluate F34’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This is also a test for whether F34 has the ability to repay its debt with cash from its business, which is less of a concern for large companies. In the case of F34, operating cash flow turned out to be 0.08x its debt level over the past twelve months. This is concerning as its incoming cash can pay off less than a tenth of what the company must return in the near term.
Next Steps:
Are you a shareholder? F34’s high debt levels are not met with high cash flow coverage. This means investors should ask themselves if they think F34 can improve in terms of debt management and operational efficiency. Given that F34’s financial situation may be different in the future, You should continue assessing market expectations for F34’s future growth on our free analysis platform.
Are you a potential investor? Although understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. Therefore, I encourage potential investors to look at F34’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
